SAN FRANCISCO — California redevelopment agency advocates and critics are on tenterhooks this week as the state Supreme Court is set to hear a case that will determine their future.
The two sides in the case will present oral arguments to the court Thursday morning in San Francisco that will test the merits of a lawsuit meant to block two new laws that force redevelopment agencies to either hand over money to the state or dissolve.
“Really, the way it has been painted by both sides in this case, is that this is a very simple case,” said Stephen Ryan, a lawyer with Cox Castle & Nicholson in San Francisco. “Can we eliminate redevelopment agencies, or on the flip side, can you steal redevelopment agency money?”
The legislation, passed as part of the budget, gives the state’s 400 RDAs the choice of either paying an estimated $2.1 billion to the state over the next two years to help balance its books, or to shut down.
The California Redevelopment Association and the League of California Cities, along with San Jose and Union City, filed the lawsuit to block the laws at the end of July, calling them unconstitutional.
In the 126-page suit, the plaintiffs argue Proposition 22, a ballot measure passed in 2010, prohibits state politicians from taking or interfering with revenue dedicated to local governments.
The defendants in the suit include California finance director Ana Matosantos, Controller John Chiang, and Patrick O’Connell, auditor-controller of Alameda County.
Gov. Jerry Brown’s stance has been that the Legislature created the RDAs and thus the legislature may eliminate them.
The court, which has expedited the case, expects to reach a decision by Jan. 15. It granted a stay in August that halted the implementation of most of the legislation.
A decision for either side would have little impact on developers and borrowers, Ryan said. However, he said a split decision by the court ruling that the payment demand is illegal, but that elimination of the agencies is allowable, could spell trouble.
As it stand in the new laws, bondholders are protected.
For the state budget, a decision that the redevelopment agency payments are illegal would force lawmakers to plug a $1.7 billion in the current budget, already precariously balanced.
According to the State Controller’s Office’s most recent report, California RDAs had $20.6 billion of tax-allocation and revenue bonds outstanding as of June 30, 2009.
The Redevelopment Association estimates roughly 20% of the state’s RDAs will shut down if the new legislation is put in place, and the rest will have less money.
If the legal malaise is cleared, Ryan said many redevelopment agencies are gearing up to complete financial dealings that have been prevented.
For some agencies, a finding for the state could mean a tough road ahead.
Standard & Poor’s placed the ratings of 16 RDAs on negative watch earlier this month because of the legislation. The rating agency said many of the bonds will come under more financial strain because they will likely lose the ability to use funds outside of pledged revenues and reserves to cover shortfalls if the laws hold.
Larger tax-allocation bond issues affected by the negative credit watch include those of the Contra Costa County Public Financing Authority and the Stockton Public Financing Authority.
Other RDAs have also been stung in the interim. The San Jose Redevelopment Agency struggled last month to get its letter of credit backing $100 million of bonds renewed by JPMorgan Chase & Co. because of the legal limbo. As a workaround, the bank extended the letter of credit with the bond trustee at the end of October.
The city of Rocklin has been dealing with a similar problem because it has been unable to extend a line of credit as a result of the laws.
